EIU Global Microscope on the Microfinance Business Environment 2010

8/7/2019 EIU Global Microscope on the Microfinance Business Environment 2010

1/74

Global microscope on themicrofi nance business environment2010An index and study by the Economist Intelligence Unit

Supported by


2/74

Global microscope on the microfi nance

business environment 2010

Economist Intelligence Unit Limited 201

About this reportThis report outlines the fi ndings of the Economist Intelligence Units in-depth analysis of the microfi nan

business environment in 54 countries. The index that underlies this report allows countries and regions

to be compared across three broad categories: regulatory framework, institutional development and

investment climate. The study uses a methodology which was originally developed for Latin America and

the Caribbean in 2007 and was employed for the fi rst time on a global basis in 2009. Most of the research

for this report was conducted prior to May 2010, although some later developments (up to July) were

included where they were particularly signifi cant. Future studies will build on this project by increasing

the number of interviews conducted, utilising new data, and refi ning the methodology. We welcome you

feedback. Please contact us at Microfi [email protected].

This work was supported by fi nancing from the Multilateral Investment Fund (MIF), a member ofthe Inter-American Development Bank Group; CAF (the Andean Development Corporation) and the

Netherlands Technical Assistance Trust Fund at the International Finance Corporation (IFC).

The complete index, as well as detailed country analysis, can be viewed at www.eiu.com/sponsor/

GlobalMicroscope, www.iadb.org/micamericas, www.caf.com/mipyme and www.ifc.org/microfi nance.

For further information, please contact:

The views and opinions expressed in this publication are those of the Economist Intelligence Unit and do notnecessarily reflect the official position of MIF, CAF, or IFC.

Economist Intelligence UnitVanesa Sanchez, Project Manager:[email protected] / +44 20 7576 8301Joanne McKenna, Press Offi cer:

[email protected] / +44 20 7576 8188Multilateral Investment FundInter-American Development BankSergio Navajas, Senior Specialist:[email protected] / +1 202 623 3268Paola A. Pedroza, Special Consultant Access to [email protected] / +1 202 623 3602Paul Raymond Constance, Press Offi cer:[email protected] / +1 202 623 2572

CAFDireccin de Promocin de Pyme y MicroempresasManuel Malaret, Manager:[email protected] / +58 212 209 2060

Ixone Soroa, Executive:[email protected] / +58 212 209 2289microfi [email protected] / +58 212 209 2291Nathalie Gerbasi, Press Offi cer:[email protected] / +58 212 209 2315

IFCMakanda Kioko, Programme Manager:[email protected] / +1 202 473 4802Renate Gamarra, Project Coordinator:[email protected] / +1 202 473 5588Scott Scheide, Project [email protected] / + 202 473 3479

Leila Search, Communications Offi cer:[email protected] / +1 202 473 7511


3/74 Economist Intelligence Unit Limited 20



2

About the Economist Intelligence UnitThe Economist Intelligence Unit (EIU) is the business information arm of The Economist Group, publishe

ofThe Economist. Through a global network of more than 650 analysts and contributors, we continuously

assess and forecast political, economic and business conditions in more than 200 countries. As the world

leading provider of country intelligence, we help executives, governments and institutions by providing

timely, reliable and impartial analysis on economic and development strategies. For more information,

visit www.eiu.com.

About the Multilateral Investment FundThe Multilateral Investment Fund (MIF), a member of the Inter-American Development Bank Group,

provides grants, investments and loans to promote private sector growth, particularly micro and small

businesses with high potential for poverty alleviation in Latin America and the Caribbean. For more

information, visit www.iadb.org/mif.

About CAF

Established in 1970, CAF is a Latin American fi nancial institution created with the aim of promotingsustainable development and regional integration. The institution promotes sustainable growth in Latin

America and the Caribbean by fi nancing projects in the public and private sectors, and by providing

technical cooperation and other specialised services. CAF consists of 18 Latin American, Caribbean,

and European governments as well as 14 private banks. It is a major source of multilateral fi nance and

knowledge generation in the region. For more information, visit www.caf.com.

About IFCIFC, a member of the World Bank Group, is the largest global development institution focused on the

private sector in developing countries. IFC creates opportunity for people to escape poverty and improve

their lives by providing fi nancing to help businesses employ more people and supply essential services,

by mobilising capital from others, and by delivering advisory services to ensure sustainable development

In a time of global economic uncertainty, IFCs new investments climbed to a record $18 billion in fi scal

2010. For more information, visit www.ifc.org.


4/74




Contents

Executive summary 4

Key fi ndings 6

Regional fi ndings 8

Country rankings 11

Overall microfi nance business 11

environment rankingsRankings by category 12

Microscope indicators 15

Microfi nance country profi les 16

East and South Asia 17

Bangladesh 17

Cambodia 18

China 19

India 20Indonesia 21

Mongolia 22

Nepal 22

Pakistan 23

Philippines 24

Sri Lanka 25

Thailand 27

Vietnam 28

Eastern Europe and Central Asia 29

Armenia 29

Azerbaijan 30

Bosnia 30

Georgia 31

Kyrgyz Republic 32

Tajikistan 32

Turkey 33

Latin America and the Caribbean 34

Argentina 34

Bolivia 35Brazil 35

Chile 36

Colombia 37

Costa Rica 37

Dominican Republic 38

Ecuador 38

El Salvador 39

Guatemala 40

Haiti 40

Honduras 41

Jamaica 41

Mexico 42

Nicaragua 43

Panama 44

Paraguay 44

Peru 45

Trinidad and Tobago 46

Uruguay 46

Venezuela 47

In focus 48

The price of microfi nance in 48Latin America and the Caribbean

Middle East and North Africa 5

Lebanon 5

Morocco 5

Yemen 5

Sub-Saharan Africa 5

Cameroon 5Democratic Republic of Congo 5

Ghana 5

Kenya 5

Madagascar 5

Mozambique 5

Nigeria 5

Rwanda 5

Senegal 5

Tanzania 5

Uganda 6

In focus 6

Current issues in microfi nance 6

Principles for the effective 6regulation and supervision ofmicrofi nance operations

Appendix 6Methodology and sources 6





4

Microfi nance is entering a new and more dynamic phase. In July 2010 Indias SKS became only the secon

microfi nance institution ever to launch an initial public offering (IPO). SKS is well known in India, whereit had almost 6 million active borrowers last year, but investors from several major US and European

banks also bought shares in the IPO. This speaks volumes about new attitudes towards microfi nance,

which is increasingly viewed by both providers and investors as a commercially viable industry. Nor is the

revolution in microfi nance confi ned to India. Thanks to innovations in mobile microfi nance, services like

Kenyas M-PESA (with 10 million customers) are using the latest communications technology to bring

fi nanceand hopeto the worlds poorest countries.

Indeed, microfi nance is rapidly shifting from a niche product to a globally recognised form of fi nance

Yet as microfi nance offerings become more sophisticated and diverse, regulatory and market gaps keep

the industry from operating as well as it should. This increases the need for a systematic way of tracking

and evaluating conditions for microfi nance.The Global microscope on the microfi nance business environment 2010 provides a basis for

benchmarking the business conditions for privately provided microfi nance in countries around the world

Commissioned and funded by MIF, CAF and IFC, the Global Microscope 2010 is the second annual effort to

evaluate and benchmark 54 developing countries. It is also the fourth yearly index to track conditions in

the 21 countries of the Latin American and Caribbean region.

The 2010 index covers the period from August 2009 through May 2010, and evaluates microfi nance

across three distinct categories: 1) the regulatory framework, including offi cial legal recognition, intere

rate restrictions, market distortions, capital requirements and regulatory capacity; 2) the general

investment climate for microfi nance providers, especially accounting standards, governance tendencies

and transparency requirements; and 3) the level of microfi nance institutional development, as measuredby market concentration, the range of services provided beyond credit and the quality of borrower

information. Although it is impossible to capture every dimension of the microfi nance environment, the

index highlights countries that have improved fi nancing options for the poor and those that still have

work to do.

Each year the Economist Intelligence Unit seeks to improve the methodology used to construct the

index. A larger and more diverse group of stakeholders was interviewed this year. An online survey was

conducted to solicit the views of an expanded community of microfi nance specialists and in-country

Executive summary





Executive summary

stakeholders. The Microscope research team also nearly doubled in size, and new institutions were invite

into the review process. New data and sources were also incorporated into the report.Additional information on methodology and scoring is provided in the Microscope indicators section

and in the appendix.





6

For the second year running, Peru, the Philippines, and Bolivia top the Economist Intelligence Units

Global Microscope index. Peru retained its position as the global leader, scoring 74.3 out of 100, similarto last years score. The Philippines and Bolivia swapped positions and fi nished second and third,

respectively, this year. Two newcomers, Pakistan and Kenya, joined the top ten, displacing Nicaragua an

Uganda.

The three best-performing countries score especially well in two of the main index categories:

regulatory framework and institutional development. Peru is the only country that ranks in the top fi ve

for all three categories. The Philippines enjoys the best overall regulatory environment for microfi nance

alongside Cambodia, which does not make the top ten overall, and Pakistan which does. As with the

highest-ranked countries, the remaining top-ten nations come from different regions and exhibit varied

macroeconomic and political characteristics. India, a large, fast-growing democracy, ranks eighth, just

below its neighbour, fi fth-ranked Pakistan, which is less stable politically and economically. Ecuador andEl Salvador, both with left-leaning governments, tie for sixth, ahead of ninth-placed Colombia, which ha

worked hard to improve its business environment in the last decade. The two African countries in the top

ten, Ghana and Kenya, are among their regions most stable economies. The countries that dropped from

the top ranks have either experienced notable deteriorations in investment and operating conditions for

microfi nance since 2009 (Nicaragua, as a result of the No Pago movement) or have simply not kept pac

(Uganda).

New to the bottom rank (54th place), Venezuela fi nishes last in the 2010 index. It replaces Thailand,

in large part because of deteriorating investment and operating conditions for NGOs, but also because

of slight improvements in Thailand, whose microfi nance sector remains highly state-led. Microfi nance

in Venezuela suffers from a weak regulatory structure and low levels of market development. Althoughranked just above Venezuela, three countries in the bottom tenTrinidad and Tobago, Jamaica and

Turkeyalso lack the appropriate level of regulatory support and have underdeveloped markets. They are

however, unique in that relatively strong investment climates help to compensate for their weaknesses

elsewhere.

Two countries, Azerbaijan and Nepal, left the bottom ranks this year. Azerbaijan now places 38th and

ties with China, thanks to improvements in its regulatory framework. Nepal benefi ted from a more hands

off approach by the state and from new regulations that facilitate micro-deposit taking. Nepal is also in

the process of drafting its fi rst microfi nance law.

Key fi ndings





Key fi ndings

Changes since last yearOf the 54 countries included in the 2010 index, 29 improved their scores, 21 fell back, and four were

unchanged. Madagascar posted the biggest improvement, largely because of its increasingly favourable

regulatory framework, a wider range of microfi nance services and efforts to improve credit reporting.

Pakistan and Nepal had the second- and third-largest gains, helped by regulatory and market reforms.

A comprehensive list of changes for 2010 can be viewed by score and by category in the Excel model,

available free of charge at www.eiu.com/sponsor/GlobalMicroscope, www.iadb.org/micamericas, www.

caf.com/mipyme and www.ifc.org/microfi nance.

Changes in methodology

As the Microscope index has evolved from a pilot project to a more established global study,improvements in the data have been made and the number of interviews and contributing reviewers has

been increased. This has occasionally led to adjustments in country evaluations even if a net change was

not noted in a particular country since last year.

A specifi c case worth mentioning is the inclusion of updated competition data from MIX Market

and additional sources and microfi nance networks in Latin America and the Caribbean and Africa.

Improvements in the fi gures and in number of institutions reported since last year led to both positive a

negative changes for countries in this study.

Finally, Ethiopia was not included this year due to a lack of corroborating information. The study will

seek to re-incorporate Ethiopia in 2011.

A note on regional representationThis index builds on earlier studies of Latin America and the Caribbean; as a result, countries from that

region are somewhat over-represented in the study (21 of 54). Countries in other regions were selected

on the basis of the importance of their existing microfi nance sectors or the potential for future market

development. The study therefore provides differing levels of geographic coverage: 11 countries were

selected from Sub-Saharan Africa, fi ve from South Asia, seven from East Asia, three from the Middle East

and North Africa, and seven from Eastern Europe and Central Asia. These differences in coverage impact

regional conclusions and should be considered carefully when evaluating index results beyond individua

country scores.





8

East and South AsiaThe Philippines and Pakistan fi ll the top regional ranks, scoring 64 points or more. They are followedby India and Cambodia, whose scores are almost ten points apart. Despite the apparent room for

improvement (on a scoring scale of 0 to 100), these countries have frameworks in place that permit bank

non-bank fi nancial institutions (which may or may not enjoy a specifi c microfi nance classifi cation),

NGOs and cooperatives to offer microfi nance services. These countries have also limited the extent and

impact of state involvement in the sector (if any). A minimum and necessary level of regulatory capacity

to oversee the active markets created by this approach has also been developed. One of the regions

strongest gainers since last year, Nepal, has made moves in this direction.

The remaining eight countries score 40 points or less and struggle with regulatory conditions in

particular. Bangladesh, which enjoys an elevated public profi le for microfi nance (owing to the presenceof Grameen Bank), ranks a mere 33rd and scores lower than it did in 2009. Bangladesh has a moderately

restrictive regulatory framework that serves to constrain a majority of microfi nance institutions, and has

fairly consolidated market. China and Mongolia also have restrictive frameworks, although market activi

is far less robust in these locations than in Bangladesh; as a result they rank several spots lower.

Countries such as Thailand, Vietnam, Sri Lanka and Indonesia wrestle with both regulatory restriction

and signifi cant state intervention that impacts competition and market development. Indeed, Sri Lanka

experienced the biggest score decrease of all the Asian countries in the study. In other cases, such as

Indonesia, creative solutions are used to bypass these constraints and private providers have become

active in microfi nance. For the most part, though, government intervention through regulation and

lending programmes creates a strong crowding-out effect.

Eastern Europe and Central AsiaNone of the Eastern European or Central Asian countries fi nished in the top ten. The regions best

performer, the Kyrgyz Republic, places 12th globally despite experiencing a slight decline in its

overall score since last year. Turkey and Bosnia place in the top three worldwide for the quality of their

investment climate, and another two countries in the region place in the top ten for their legal and

regulatory frameworks (Kyrgyz Republic and Tajikistan). Despite noticeable regulatory capacity gaps

Regional fi ndings





Regional fi ndings

in Turkey and Bosnia, the majority of the countries in the region enjoy at least some (if not signifi cant)

specialised capacity for microfi nance oversight. To their credit, governments in Eastern Europe andCentral Asia generally do not engage in direct fi rst or second-tier microlending1; rather, their weakness

generally stems from a need to streamline regulations and change legal frameworks to allow or facilitate

NGO participation in the sector. Turkey is the regions most extreme case: the legal framework and

regulatory environment actually serve as obstacles to the establishment of new microfi nance institution

Latin America and the CaribbeanAs home to the overall best and worst performer in this years index, Latin America and the Caribbean ha

the largest range of scores among the six regionsa trend that is also evident among the three category

scores.

Interestingly, only three out of 21 countries place in the top ten for their regulatory and legalframeworks (Peru, Bolivia and Paraguay). Yet fi ve countries from the region place in the top ten overall

(Peru, Bolivia, El Salvador, Ecuador and Colombia). This can be explained by the fact that non-regulatory

measures, including market activity, services offered and credit bureau infrastructures, are relatively we

established on a regional level. The relative dominance of Latin American countries in the institutional

development categorythey hold eight of the top ten slotsreinforces this point.

Conversely, Latin America and the Caribbean house some of the most inactive markets. Countries

such as Venezuela, Trinidad and Tobago and Jamaica score at the bottom of the index overall and for

at least two of the three categories. Nine countries exhibit high levels of market concentration and low

competition, and the majority (14 out of 21) only offer a modest range of services. Of all countries in

the region, Nicaragua lost the most points. This is mainly due to the negative effects of the No Pago

movement on the regulatory environment and fi nancing conditions for microfi nance institutions (MFIs)

Middle East and North AfricaThe three Middle Eastern and North African countries examined in this study offer stark contrasts. The be

performer is Yemen, ranking 27th globally despite high levels of political instability and economic stress

Yemen has developed and maintained a good regulatory framework for microfi nance and has worked to

strengthen regulatory capacity. The second-best performer regionally is Morocco. Although it has a high

active microcredit market, the range of services microfi nance institutions are allowed to offer is restricte

and the market is dominated by a few large players. The countrys investment climate for microfi nanceremains among the best in the world, however. The lack of microfi nance-specifi c regulatory attention is

strongly felt in Lebanon, where the market remains underdeveloped, under regulated and is fragmented

along ethnic and political lines.

Sub-Saharan AfricaGhana and Kenya, two of Sub-Saharan Africas strongest and most stable countries, are leaders on

a regional and global level, placing in the top ten overall. Uganda is close behind, ranking 11th. All

three countries have strong regulatory frameworks that allow all types of microfi nance institutions to

1. The Kyrgyz Republic is anexception to this generalization,as a state-funded microlenderbegan operations earlier thisyear.





Regional fi ndings

10

serve low-income populations. Clients in these three countries benefi t from active markets in which

institutions offer a wide range of services beyond microcredit; indeed, Kenya has a global reputationfor innovation and dynamism in microfi nance. The presence of savings and credit co-operatives in these

countries contributes in large part to service availability and variety, though these institutions, when lef

unregulated, can also negatively infl uence governance and transparency standards.

All 11 Sub-Saharan African countries examined in this study have microfi nance-specifi c frameworks

and policies in place, regardless of their regional or global rank. Some countries have begun improving

their frameworks; Nigeria is reviewing existing policies to address rapid institutional growth, Kenya is re

evaluating its framework governing institutional transformation, and Ghana has strengthened regulator

requirements for microfi nance institutions. Some countries struggle with larger macroeconomic and

government effectiveness issues that undermine the microfi nance environment at a broader level

(including the Democratic Republic of Congo, which had the biggest score decrease, and Madagascarwhich saw the most improvement). Others, such as Senegal and Cameroon, wrestle with the slow pace of

regulatory implementation for reforms passed in prior years. However the regulatory framework in the

region showed little evidence of deterioration over the past year. Ten of the 11 countries covered saw

their regulatory framework scores either increase or hold steady. The greatest room for improvement is

in credit bureau development, competition levels and investment climate. Nine of the 11 countries fall

in the bottom half globally for investment climate, and they struggle to ensure minimum transparency,

governance and accounting standards for microfi nance.





Country rankings

Rank Country Score Scorechange

since2009

1 Peru 74.3 +0.5

2 Philippines 71.8 +3.3

3 Bolivia 69.6 -2.2

4 Ghana 64.9 +4.0

5 Pakistan 64.8 +8.3

=6 Ecuador 61.3 +1.7

=6 El Salvador 61.3 +3.8

8 India 59.1 -3.0

9 Colombia 56.8 -1.8

10 Kenya 55.0 -0.8

11 Uganda 53.9 -3.6

12 Kyrgyz Republic 53.0 -3.2

13 Nicaragua 52.3 -6.3

14 Chile 52.0 +4.0

15 Paraguay 52.0 +2.5

16 Cambodia 51.0 -3.2

17 Panama 50.8 -

18 Honduras 49.8 +0.5

19 Guatemala 49.5 -2.3

20 Dominican Republic 48.7 +1.7

21 Georgia 48.7 +3.7

22 Armenia 47.6 +3.723 Mexico 47.3 -

24 Tanzania 46.2 -2.2

25 Tajikistan 45.7 +5.3

26 Brazil 45.0 +1.0

27 Yemen 44.4 +2.3

Rank Country Score Scorchang

sinc200

28 Nigeria 44.2 +4.

=29 Costa Rica 42.4

=29 Rwanda 42.4 +3.

31 Madagascar 41.3 +9.

32 Bosnia 40.4 -2.

33 Bangladesh 39.5 -3.

34 Mozambique 38.6 -1.

35 Nepal 38.1 +8.

36 Cameroon 37.3 +5.

37 Argentina 36.7 +5.

=38 Azerbaijan 35.9 +7.

=38 China 35.9 +1.

40 Haiti 35.7 +2.

41 Indonesia 35.3 +0.

42 Sri Lanka 34.2 -6.

43 Senegal 32.5 -0.

44 Mongolia 30.4 +0.

45 Morocco 30.3

46 Uruguay 29.8 +1.

47 Democratic Republic of Congo 27.8 -9.

48 Turkey 27.4 -2.

49 Lebanon 26.3 -3.50 Thailand 24.6 +3.

51 Jamaica 23.3 -0.

52 Vietnam 22.7 +1.

53 Trinidad and Tobago 21.9 -1.

54 Venezuela 21.6 -2.

Overall microfi nance businessenvironment rankings

Weighted sum of category scores (0-100 where 100=most favourable)


13/74





Country rankings

Investment climateWeighted 20% in the overall index


since2009

1 Chile 76.7 +3.3

2 Turkey 70.6 +2.53 Bosnia 64.7 -0.8

4 Morocco 59.7 -

5 Peru 59.2 +2.8

=6 Brazil 58.3 +4.7

=6 Kenya 58.3 +8.3

=6 Panama 58.3 -

9 Costa Rica 58.1 -

10 Ghana 57.8 +3.3

11 Mexico 57.5 -

12 Colombia 55.0 +3.613 Armenia 54.7 +1.7

14 India 53.6 +1.7

15 Uruguay 53.3 +7.5

16 Uganda 52.9 -1.3

17 Trinidad and Tobago 51.1 -5.0

18 Philippines 50.6 -

19 Jamaica 50.0 -1.7

20 Pakistan 49.2 -

21 El Salvador 48.3 +2.5

=22 Bolivia 47.8 +1.7=22 Georgia 47.8 +1.7

24 Mozambique 47.1 +8.2

25 Cambodia 46.4 +0.8

26 Mongolia 43.6 -2.0

=27 Bangladesh 43.3 +0.8


sinc200

=27 Dominican Republic 43.3 +8.

=27 Guatemala 43.3 +0.=27 Tanzania 43.3 +5.


=31 China 42.2 +9.

33 Senegal 41.7 -0.

=34 Nicaragua 40.8 -6.

=34 Tajikistan 40.8 +1

36 Lebanon 40.0 +1.

37 Indonesia 39.2 +0.

38 Paraguay 38.9

39 Sri Lanka 37.8 -1.40 Argentina 37.5

=41 Rwanda 37.2 +6.

=41 Venezuela 37.2

43 Thailand 35.3 +4.

44 Yemen 34.7 -0.

45 Vietnam 34.4 +5.

46 Honduras 32.2 +2.

47 Nepal 31.9 +11.

=48 Ecuador 31.7 +4.

=48 Kyrgyz Republic 31.7 -3.50 Nigeria 29.2 -5.

51 Madagascar 27.2 -0.

52 Haiti 24.4 -5.

53 Cameroon 23.9 -0.

54 Democratic Republic of Congo 22.2 -3.





Country rankings

14

Institutional developmentWeighted 40% in the overall index


since2009

=1 Bolivia 75.0 -

=1 Ecuador 75.0 +8.3=1 Peru 75.0 -

=4 El Salvador 66.7 +8.3

=4 Nicaragua 66.7 -

=4 Philippines 66.7 +8.3

=7 Colombia 58.3 -

=7 Ghana 58.3 +8.3

=7 Guatemala 58.3 -

=7 Honduras 58.3 -

=7 India 58.3 -8.3

=12 Dominican Republic 50.0 -=12 Pakistan 50.0 +8.3

=14 Argentina 41.7 +8.3

=14 Armenia 41.7 +8.3

=14 Chile 41.7 +8.3

=14 Georgia 41.7 +8.3

=14 Kyrgyz Republic 41.7 -

=14 Nepal 41.7 +8.3

=14 Panama 41.7 -

=14 Paraguay 41.7 -

=14 Sri Lanka 41.7 -8.3=23 Bangladesh 33.3 -8.3

=23 Brazil 33.3 -

=23 Costa Rica 33.3 -

=23 Haiti 33.3 +8.3

=23 Kenya 33.3 -


sinc200

=23 Madagascar 33.3 +16.

=23 Mexico 33.3 =23 Nigeria 33.3 +8.

=23 Uganda 33.3 -8.


=32 Bosnia 25.0

=32 Cameroon 25.0 +8.

=32 China 25.0

=32 Indonesia 25.0

=32 Rwanda 25.0

=32 Tajikistan 25.0 +8.

=32 Tanzania 25.0 -8.=32 Thailand 25.0

=32 Yemen 25.0

=42 Cambodia 16.7 -8.

=42 Mongolia 16.7 +8.

=42 Mozambique 16.7 -8.

=42 Senegal 16.7

=42 Trinidad and Tobago 16.7

=42 Uruguay 16.7

=42 Venezuela 16.7

=49 Democratic Republic of Congo 8.3 -8.=49 Jamaica 8.3

=49 Lebanon 8.3 -8.

=49 Morocco 8.3

=49 Turkey 8.3 -8.

=49 Vietnam 8.3


16/74




Microscope indicators

The 13 indicators for this index, and the categories into which they are subdivided, are as follows:

Regulatory framework

1) Regulation of microcredit operations

2) Formation and operations of regulated/supervised specialised MFIs

3) Formation and operation of non-regulated MFIs

4) Regulatory and examination capacity

Investment climate

1) Political stability

2) Capital market stability

3) Judicial system

4) Accounting standards for microfi nance5) Governance standards for microfi nance

6) MFI transparency

Institutional development

1) Range of services offered by MFIs

2) Credit bureaus for microfi nance

3) Level of competition in the microfi nance sector

Scoring methodology: Each of the 13 scoring criteria are scored from 0 to 4, where 4= best and 0 = worst

Ten of the 13 indicators receive integer scores. The remaining three (Political stability, Capital market

stability, and Judicial system) are an average of several sub-indicators, thereby producing decimal scorein some cases.

Once indicator scores have been assigned, these are aggregated to produce an overall scoring range

of 0 100, where 100= best. Overall scores and rankings were calculated by attributing a 40% weight to

Regulatory framework and Institutional development category scores and a 20% weight to the Investme

climate category score. For a detailed description of the scoring methodology, please refer to the

appendix.





16

The following section provides a brief profi le of the microfi nance business environment and indicates ke

changes since last year for each of the 54 countries in this study. Countries are listed in alphabetical ordeand are organised by region. Each country profi le is presented in two parts: the fi rst section contains a

brief background on a countrys microfi nance sector, and the second section outlines key developments

since last year. Please note that the information selected for the country profi les is meant to be a high-

level overview. It is not intended to provide a complete outline of the legal environment or represent a

comprehensive account of all recent activity. For more in-depth analysis and regulatory detail, please

visit the country profi le tab of the Excel model available free of charge at www.eiu.com/sponsor/

GlobalMicroscope, www.iadb.org/micamericas, www.caf.com/mipyme and www.ifc.org/microfi nance.

Microfi nance country profi les


18/74





BangladeshKey characteristics of the microfi nance business environment:

l Non-governmental organisations (NGOs) are regulated by the Microcredit Regulatory Authority (MRA

whereas banks are regulated by Bangladesh Bank (the central bank). Grameen Bank, the countrys

largest microfi nance institution (MFI), is regulated by a separate law that established the Grameen

Bank Project as a specialised bank in 1983.

l Microfi nance is well-established and the market continues to grow, despite exceptionally high marke

penetration. Although many MFIs operate in Bangladesh, the top ten account for 87% of total saving

and 81% of total loans.

l The lack of effective credit bureaus for microfi nance transactions, a ban on deposit-taking by MFIs

from non-members, and the current prohibition on the use of mobile technology by MFIs restricts the

expansion of microfi nance operations.

Key changes and impacts since last year:

l Internal and external threats to the stability of the government and the political system have been

greatly reduced since civilian rule resumed in January 2009. The risk of ad hoc policy reversals or

populist interventions in the microfi nance sector is low.

l The Microcredit Regulatory Authority (MRA) has become more proactive in enforcing the national

policy framework passed in 2006 for NGO-MFIs. The MRA has made progress in developing licensing

standards for MFIs, has increased consultations with MF stakeholders and is gradually building its sti

minimal capacity (staffi ng is limited and the MRA has no offi ce outside the capital).

l As of June 2010 the MRA was preparing draft rules to enforce interest rate regulations and to restrictNGO-MFIs ability to receive and mobilise compulsory deposits.

l High infl ation has eroded the disposable incomes of the poor and has led to a marginal decline in

repayments. This has increased pressure on the central bank and the MRA to reduce or restrain intere

rates in the sector.

l Both the MRA and MFIs are keen to see the creation of credit bureaus. The number of borrowers with

multiple loans has increased, as evidenced by a report from the Bangladesh Institute of Development

Studies which found that about 15% of microfi nance households had loans from multiple MFIs,

suggesting high indebtedness.

East and South Asia






18

CambodiaKey characteristics of the microfi nance business environment:

l Licensing, regulation, and supervision of microfi nance are conducted by the National Bank of

Cambodia (NBC, the central bank) under the Law on Banking and Financial Institutions (LBFI) of

1999. The regulatory framework permits limited liability companies (LLCs, including banks) to offer

microcredit services. So far, only one bank is active in microfi nance.

l A framework for upgrading from non-governmental organisation (NGO) status exists, and the NBC

actively encourages the transformation of microfi nance institutions (MFIs) into regulated institution

In accordance with the LBFI, MFIs meeting certain portfolio or borrower-size criteria are required to

become licensed as an LLC or a co-operative.

l

The role of international NGOs in creating many of the leading MFIs, and the desire to attract foreigninvestors, has led to relatively strong governance standards. Representatives of international

institutions sit on most MFI boards, and internal audit and control functions are well developed.

l The NBC has a strong commitment to transparency in the sector. It collects and publicises the interes

rates of all fi nancial institutions on a quarterly basis. The charging of fl at interest rates is outlawed, s

all microfi nance providers charge interest on the declining balance of the loan. Almost all the major

MFIs have received an external rating, as this is required by international investors.

l The onset of the global fi nancial and economic crisis revealed a severe over-indebtedness problem in

the Cambodian microfi nance sector. A plan to create a credit bureau exists, but it is not expected to b

operational before 2011.


l The NBC has eased the process for non-bank fi nancial institution-MFIs (NBFI-MFIs) to win permission

to take deposits. Four NBFI-MFIs already have licences, and others have submitted applications.

l There are no offi cial mobile money regulations in Cambodia. However, the fi rst mobile payments

programme in the country was launched in January 2009 by WING, a subsidiary of the Australia and

New Zealand Banking Group (ANZ). Expansion of this service is held back by the requirement to use

local currency, as Cambodia is highly dollarised. Institutions (including MFIs) generally lend in dolla

to avoid exchange-rate risk.

l A new NGO law is being drafted that could restrict for-profi t activities, such as microfi nance. However

the details of the draft legislation have yet to be fi nalised and it remains to be seen how it will impacton the MFI-NGO segment. At the same time, a draft law (the Financial Trust Law) has been prepared

and is currently in formal revision stages. If passed, the law would help MFIs clarify their ownership

structures.


20/74





ChinaKey characteristics of the microfi nance business environment:

l Microfi nance is in its infancy in China and there is little competition among the main players, owing t

their small size and wide geographical distribution. Usually, not more than one microcredit company

(MCC) is active is any given county. Regulatory restrictions help to explain why most microfi nance

institutions (MFIs) remain relatively contained geographically. This is especially the case for sector

institutions such as village and township banks (VTBs).

l The regulatory capacity of the Peoples Bank of China (PBC, the central bank) and China Banking

Regulatory Commission (CBRC) are relatively strong, so the institutions that fall under their authority

are well regulated. MCCs are supervised by provincial government fi nancial offi ces, whose capacity

is much weaker. Given the rapid expansion of MCCs in the last two years, this is a major concern,although it is unlikely to imperil fi nancial sector stability, as they do not take deposits.

l The China Foundation for Poverty Alleviation (CFPA) enjoys a privileged position owing to its ties

with the state, and can lobby effectively within the regulatory system. CFPA is in theory a non-

governmental organisation (NGO), but it emerged from a poverty-alleviation programme. The states

past view of microfi nance as a poverty-alleviation tool has hindered the development of profi table

microfi nance, notably by distorting customer expectations.

l It is relatively diffi cult and unusual for lightly regulated institutions, such as the MCCs, to upgrade int

deposit-taking institutions like VTBs. It is more common to see regular banks moving into downscale

lending via VTBs.


l The CRBC does not appear to support a rapid expansion of VTBs; as of end-2009 there were around

150. Rural credit co-operatives (RCCs) were formerly ineffective as a vehicle for fi nancing small

loans in rural areas, partly owing to a very conservative approach to loan issuance and the diffi culty

of persuading loan offi cers to approve loans. Their provision of microcredit has, however, recently

improved.

l Although the China Credit Reference Centre (CRC, the central credit bureau) is reasonably

comprehensive, most MFIs do not yet participate in the system. The government has undertaken

consultations on a new law that would regulate credit bureaus (excluding the CRC).

l The Agricultural Bank of China (ABC) extended an Rmb200m (US$29.5m) loan to the CFPA in 2009.This loan should help the CFPA increase the scale of its microfi nance operations signifi cantly.

l The services offered by MFIs depend on their legal status. MFIs that are regulated by the CBRC can

offer a wide variety of services, including deposit-taking and other banking services. However,

those not under the CBRC, such as MCCs and unregulated MFIs, are essentially limited to lending

and offering fi nancial consultation services. There are some tentative projects underway in the fi eld

of microinsurance, especially in poorer regions, but the insurance regulator, the China Insurance

Regulatory Commission, has not been enthusiastic in its promotion of this concept.






20

IndiaKey characteristics of the microfi nance business environment:

l The microfi nance sector has continued to grow rapidly and with it the need for better regulation. The

proposed Microfi nance Bill has been pending in Parliament since 2007, although it is expected to pas

in 2010. However, the bill does not cover non-bank fi nancial companies (NBFCs) and microfi nance

institutions (MFIs) registered as not-for-profi t companies, thereby ignoring over 80% of the

microfi nance sector.

l The Reserve Bank of India (RBI, the central bank) regulates two types of institutions that engage

in microfi nance activities: banks and NBFCs. There are also Self-Help Groups (SHGs) that operate

as informal credit and savings groupings of 5-30 poor individuals. Under the proposed bill, the

National Bank for Agriculture and Rural Development (NABARD) would be responsible for regulating,registering and overseeing the microfi nance activity of SHGs and NGO-MFIs. A real possibility is a

regime with two regulatorsRBI for NBFCs and banks and NABARD for SHGs and NGO-MFIs.

l Although they are the largest MFIs, NBFCs are not allowed to accept fi xed-term deposits without

special approval, which requires an investment grade rating from a credit rating agency. Both

regulatory approval and credit ratings have become increasingly diffi cult, if not impossible, to obtain

NGO-MFIs are currently prohibited from accepting deposits; however, the Micro Financial Sector Bill

pending in parliament since 2007 could open up deposit-taking restrictions on NGO-MFIs.


l

Under two separate circulars issued in 2009, domestic banks are required to lend 10% of their adjustnet bank credit to weaker players, such as SHGs, or to MFIs that lend to SHGs.

l A Microfi nance Credit Information Bureau is being created; it will pool borrowers details from 34

participating NBFC-MFIs that are part of the Microfi nance Institutions Network (MFIN, a regulatory

organisation). Moreover, existing credit bureaus are actively involved in a collective effort to

standardise data collection from MFIs, as well as to settle on a common data format.

l The central bank has allowed 29 banks to operate mobile-based payment services. Some pilots have

involved MFIs, but there has been no widespread roll-out of the service.

l As of 1st July 2010, RBI lifted interest rate restrictions on small loans provided by commercial banks

an effort to increase the level of competition in the microfi nance sector. Previously, interest rates for

all loans under Rs200,000 (around US$4,300) from commercial banks had to be set at a level equal toor below the banks benchmark Prime Lending Rate.


22/74






22

MongoliaKey characteristics of the microfi nance business environment:

l Commercial banks are the primary providers of formal microfi nance in Mongolia. These institutions

are governed by banking laws and are regulated by the Bank of Mongolia (the central bank). There ar

only a handful of signifi cant, regulated non-bank fi nancial institutions (NBFIs), although some smal

scale microfi nance institutions (MFIs) operate outside of the law or on the basis of ad hoc agreement

with the government.

l Mongolia has a relatively developed microfi nance sector, with a high degree of outreach. However,

two commercial banks (Khan Bank and XacBank) dominate the market.

l Banks are permitted to take deposits, but NBFIs are not.

l

Partly owing to the infl uence of foreign investors, accounting and governance standards in theleading MFIs tend to be higher than the average for Mongolias fi nancial sector. However, many

NBFIs and savings and credit co-operatives (SACCOs) lack management experience and do not follow

international management practices.

l Mobile banking services (m-banking) exist and are used by both Khan Bank and XacBank, and license

NBFIs can also offer these services. However, there is no legal framework for overseeing agencies

involved in m-banking.


l A private credit bureau was legally incorporated in Mongolia in 2009 and preparations for full

operation are underway. It has 18 shareholders, including Khan Bank and XacBank.l The Financial Regulatory Commission is now inspecting non-deposit-taking lenders, insurance

companies and SACCOs on a regular basis. However, lack of transparency remains a problem.

l The non-bank SACCOs experienced a serious downturn in 2008 when global commodity prices fell

sharply in response to the international fi nancial crisis. Two mid-sized banks have since gone into

receivershipalthough the countrys top banks (which account for the majority of fi nancial system

assets) look more stable.

Nepal

Key characteristics of the microfi nance business environment:l The main formal providers are upscaled non-governmental organisations (NGOs) and regional rural

development banks (RRDBs); as of April 2010 there were 18 of these institutions in operation.

l RRDBs were formerly state-run, but four out of fi ve are now privately owned. The largest government

player is the Agricultural Development Bank, which provides wholesale funds to related standalone

co-operatives (Small Farmer Co-operatives).

l Private-sector institutions that were created by greenfi eld or upscaled NGOs are offi cially classifi ed a

microcredit development banks (MCDBs).

l Public and private institutions are regulated identically. Although there are no interest rate


24/74





restrictions in Nepal, the role of government institutions has kept lending rates unsustainably low, a

18-25%.l As of April 2010, 45 fi nancial intermediary NGOs (FINGOs) were in operation and are currently

registered with the Nepal Rastra Bank (NRB, the central bank). FINGOS and MCDBs can take deposits

from their members. FINGOs also have a limited banking licence, which allows them to borrow from

commercial banks for client-lending purposes. These borrowings usually fall under the mandatory

deprived-sector lending portfolio of commercial banks.

l Savings and credit co-operatives (SACCOs) are key microfi nance providers; several thousand are

estimated to exist, of which only 16 have a limited banking licence from the NRB. As of June 2009, 6

SACCOs were members of the Nepal Federation of Savings and Credit Co-operatives, covering 325,000

clients.

l Mobile banking is non-existent in Nepal at present. A handful of pilot projects have been implementeand more banks have plans to start them. This is not, however, a priority for mobile service providers

and there is no regulatory framework for this kind of service in the fi nancial sector or within

microfi nance specifi cally.


l Based on a central bank directive issued in August 2009, several banks and fi nancial services provide

have applied to open microfi nance institutions (MFIs) as subsidiary companies.

l In March 2010 the NRB opened the door for MCDBs to collect voluntary deposits from the public (in

addition to their members). This was meant to address resource constraints and competitive pressure

facing independent MFIs now that banks and other fi nancial institutions can invest in their ownsubsidiary MFIs following the 2009 directive.

l The country is developing its fi rst microfi nance law. Currently, a draft of the Microfi nance Act include

plans to establish a separate regulatory organisation to supervise microfi nance development banks

and fi nancial intermediary NGOs. Ongoing political instability, however, threatens the promulgation

of the Act.

PakistanKey characteristics of the microfi nance business environment:

l All microfi nance providers are required to register either with the Security and Exchange Commission

of Pakistan (SECP), the State Bank of Pakistan (SBP, the central bank), or their respective provincial

authority. The SBPs supervisory capacity is considered strong.

l In 2005 the SBP issued guidelines permitting non-governmental organisation-microfi nance

institutions (NGO-MFIs), rural support programmes (RSPs) and co-operatives to transform into forma

microfi nance banks (MFBs). Specialised MFBs are the most important service providers in Pakistan.

Five are active at a national level and two are active at the district level. Microfi nance banks face the

same prudential regulations as commercial banks and can offer the same range of services to their

clients.






24

l Provincial government-backed fi nancial institutions, such as the Bank of Khyber, and institutions

that were launched with an endowment from the government, such as the National Rural SupportProgramme (NRSP), do not distort the market.

l At the end of 2009 there were 2.35m micro-savers in the country, more than the number of borrower

(1.8m). However, many of those savers are part of borrower groups who are required to save to receiv

a loan. In fact, 56% of the savers as a whole are members of the NRSP. The number of voluntary micro

savers at MFBs numbered only 450,000 at the end of 2009.

l The range of products offered by MFBs remains focused on credit, based on group-lending

methodologies. Micro-insurance has begun to move beyond the traditional credit-life product offerin

to health and hospitalisation insurance, as in the case of the NSRP. At the end of 2009 there were 3.3

micro-insurance policy holders in Pakistan, nearly double the number of borrowers.


l In 2009 the central bank issued a number of new rules supporting microfi nance banks (MFBs), such

as lifting regulations that prevented them from accepting foreign currency loans from international

investors. The limits on borrowers annual income were revised upward from PRs150,000 (US$1,780)

to PRs300,000 for general loans, and PRs600,000 for housing loans. Also, the loan classifi cation

criteria for MFBs were aligned with international best practice and industry norms.

l The Pakistan Microfi nance Network (PMN), a sector association with 26 MFI members, plans to set up

a credit bureau. The bureau will be pilot-tested in the most populous district, Lahore, before being

rolled out nationwide in 2011.

l Islamic banking is expected to come to Pakistans microfi nance sector in 2010 with the opening of anIslamic branch by the NGO-MFI, Asaha. Once the branch opens, Asaha plans on converting 27 existing

branches into a Sharia-compliant network.

PhilippinesKey characteristics of the microfi nance business environment:

l Since the adoption of a National Strategy for Microfi nance in 1997, the government has promoted

a regulatory and policy framework that is conducive to microfi nance activity. The government has

encouraged the establishment of microfi nance banks (MFBs) and the commercialisation of the

microfi nance sector, and has specifi cally promoted the upgrading of non-governmental organisation

(NGOs).

l Downscaling is also legal and fairly straightforward. However, commercial banks have withdrawn the

few attempts made to provide retail microfi nance services, preferring to act as wholesale funders to

the sector instead.

l There are no regulatory restrictions on the ability of microfi nance institutions (MFIs), whether banks

or NGO-MFIs, to accept debt investment from international investors in foreign currency. However,

rural banks are prevented from taking foreign equity investments.

l The Bangko Sentral ng Pilipinas (BSP, the central bank) requires all regulated MFIs to disclose


26/74





effective interest rates and to be audited by an external auditor. However, NGO-MFIs, which are amon

the largest providers in the country, are unregulated and thus not obligated to disclose informationunder these provisions.

l Although still very much credit-oriented, MFIs in the Philippines are able to offer a variety of services

and many do. Regulated MFIs can accept deposits, and those linked to the international payments

system can accept remittances.

l Clients in the Philippines have a wide choice of service providers, including local and national

institutions. There are a relatively small number of national microfi nance providers and many smalle

local ones. The top ten service providers account for just over half of all loans outstanding in the sect

and 66% of all clients.

Key changes and impacts since last year:l In 2010 BSP began allowing rural, co-operative, and thrift banks to sell authorised micro-insurance

products. These institutions can be licensed as micro-insurance agents, and can only sell policies up t

Php190,000 (around US$4,000) under certain provisions.

l In April 2010 the BSP issued a circular that set the rules for accrediting microfi nance rating agencies,

a move seen as encouraging local MFIs to be rated. Until recently, it was rare for microfi nance banks

(MFBs), rural banks, or thrift banks with microfi nance operations to become externally rated.

l In 2010 BSP issued rules on the extension of housing microfi nance and eased requirements for micro

lending in agriculture.

l The Credit Information System Act signed into law in September 2008 requires all regulated entities

to submit positive and negative information to a new credit bureau under the Securities and ExchangCommission (SEC). However, the establishment of the Central Credit Information Corporation (CCIC)

has not yet resulted in the operation of a functioning, active credit bureau, despite the fact that

implementing rules and regulations (IRR) were approved in May 2009. According to local press,

operations are now expected to begin in the third quarter of 2010.

l In 2009 the Bank of the Philippine Islands and one of the two main mobile telephone service

providers, Globe, formed a joint venture to launch mobile-oriented retail microfi nance.

Sri LankaKey characteristics of the microfi nance business environment:

l There is no specifi c regulation governing the microfi nance sector, which has led to a variety of

different regulatory regimes and the lack of a level playing fi eld between microfi nance institutions

(MFIs). As a result, many non-governmental organisations (NGOs) operate in what amount to

regulatory black holes.

l The regulated microfi nance sector consists of rural development banks (RDBs) and similar specialist

banks; the Samurdhi Bank Societies (SBSs), co-operative rural banks (CRBs); the thrift and credit co-

operative societies (TCCSs) of the SANASA network; NGO-MFIs; and other fi nancial entities, including

commercial banks and fi nance companies.






26

l Interest rates are not circumscribed by regulation, but the market is heavily distorted by a high level

of state-led intervention. The government often regards microfi nance services as a welfare issue, andsometimes applies political pressure to give free loans or cap interest rates. Some MFIs themselves

place greater focus on social welfare activities, leading to confl icts of interest that impede the

commercialisation of microcredit.

l Many MFIs offer broad product portfolios that generally consist of loans differing in name and tenure

Licensed and specialised banks mobilise deposits, while NGO-MFIs impose compulsory savings

requirements on their loans. Government suspicions about the risks of MFIs expanding into new

services impede the diversifi cation of the sector.

l Financial institutions that lend to MFIs and to microfi nance clients consider their clients a

homogeneous demographic. This is not the case, however, and inadvertently directs services toward

institutions and clients with incomes well above the poverty line.


l The North and East of the island, which include some of the islands poorest regions, provide an

opportunity for the expansion of microfi nance services.

l The National Development Trust Fund (NDTF) in 2009 imposed a cap of 15% on interest rates for on-

lending of its funds. At such a low rate, there is little commercial incentive for banks to expand into

microcredit.

l The electoral season in early 2010 (when presidential and parliamentary elections were held) may

have exerted pressure on MFIs to write off and extend loans at unprofi table rates. This has not been

confi rmed, however.l NGO-MFIs are having a harder time obtaining capital, as donor funds associated with the 2004 Indian

Ocean tsunami recovery effort are running out.

l In March 2010 plans were announced to introduce a Microfi nance Act later in the year. No details hav

been confi rmed, although early reports suggest that it will be substantially different than the previou

draft of a similar name.

l In 2009 the government launched the Vadakkin Vasantham special loan scheme for the Northern

province, which provides SLRs3bn (around US$26m) to fi nance loans to micro-, small and medium-

sized enterprises at a concessionary rate of 9%. The subsidised interest rate continues a government

trend of using subsidised lending for welfare purposes, which crowds out commercial microfi nance

activity.


28/74





ThailandKey characteristics of the microfi nance business environment:

l Microfi nance in Thailand is generally a government-sponsored activity. Although there is a

commitment to the provision of microloans through local village funds, this has stifl ed the

development of private sector provision. The Bank of Thailand (BOT, the central bank) is keen on

making changes, and has unveiled a plan affording opportunities to new and qualifi ed microfi nance

service providers to enter the market.

l That said, the BOT has yet to prove that it has developed the specialised capacity to regulate or

supervise microfi nance institutions (MFIs).

l Under the Civil Procedure Code, an interest rate ceiling of 15% is in place for lending by unoffi cial

fi nancial institutions. In practice, lending rates by unoffi cial lenders are higher than this. The centrabank has set a ceiling of 28% for combined interest and charges on all personal consumer and credit

card loans; according to local commentators, this prevents some small-scale credit companies from

offering microcredit. Other loans, such as corporate loans, are not subject to caps on interest rates

l Large state-owned specialised fi nancial institutions dominate the microfi nance market. Since

competition is constrained by government players, there has been no adoption of international

accounting standards.


l Under the Financial Sector Master Plan (FSMP) Phase II for 2010-14, which was unveiled in late

2009, the authorities intend to relax some regulations to allow new domestic or foreign microfi nanceproviders to set up operations. The new plan will also permit commercial banks to establish affi liate

companies to provide microfi nance and tie up with other operations (such as co-operatives) to provid

services. The BOT and Ministry of Finance intend to consider new licences on a case-by-case basis,

subject to applicants qualifi cations and the guidelines set.

l Although the FSMP Phase II plan has been unveiled, the practical implications of the new regulations

have not yet been detailed, and the stated plans have generally met with a negative response from

existing microfi nance providers.

l A state-owned specialised fi nancial institution, the Bank for Agriculture and Agricultural Co-

operatives (BAAC), is planning to launch a new Village Banking programme in 2010, with a loan fund

of Bt3bn (US$93m) and which will offer subsidised interest rates. The introduction of BAAC is expecteto further limit competition from small-scale private institutions.






28

VietnamKey characteristics of the microfi nance business environment:

l The microfi nance sector in Vietnam is dominated by the Vietnam Bank for Social Policy (VBSP), which

disburses heavily subsided loans. There are other government programmes and institutions, which,

along with VBSP, comprise around 90% of microcredit in the country.

l The few private semi-formal microfi nance institutions (MFIs) that exist are geographically limited an

mainly offer services to members of the mass organisations with which they are affi liated. The only

sizeable semi-formal MFIs are Capital and Fund for Employment of the Poor (CEP, in Ho Chi Minh City)

and Tao Yeu May (TYM, in Hanoi). Given their different locations, they do not compete with each othe

although they both compete with the VBSP.

l

The supervisory capacity of the State Bank of Vietnam (SBV, the central bank) for microfi nance isconsidered weak. The SBV is thought to focus more on compliance than supervision of fi nancial

institutions, but the lack of progress in issuing licences to semi-formal MFIs is symptomatic of the

central banks inability to adequately assess regulatory compliance.

l The range of services offered by MFIs is limited. Although loans are widely available, other services,

such as risk-management products, are neglected. State-owned banks focus more on providing chea

credit than mobilising savings, while the semi-formal MFIs are not allowed to take voluntary deposits

l Accounting and governance standards are generally poor. In the microfi nance sector, state-owned

providers follow Vietnamese Accounting Standards, which fall short of international best practice. Th

semi-formal MFIs have not adopted any international standards either, as they are prohibited from

accepting foreign investment.


l Although new regulations have been introduced that provide a legal foundation to formalise MFIs

and incorporate them into the fi nancial system, the SBV is still in the process of fi nalising legislation

that will guide regulatory implementation. The SBV has indicated that it will not be able to issue

any licences until 2011 at the earliest. Until then, semi-formal MFIs will continue to face a host of

operational diffi culties, such as the inability to mobilise deposits and access foreign funds.

l In late 2009 the Asian Development Bank (ADB) and the Japan Fund for Poverty Reduction announce

the provision of a US$1.5m grant aimed at assisting the government in formalising the provision of

microfi nance by private institutions under the new regulatory environment. Staff at MFIs receivingsupport will receive training on compliance and international best practice.

l The SBV lifted restrictions on interest-rate setting for semi-formal MFIs effective March 2010. The cap

on rates for loans was previously 150% of the base rate of the SBV.

l A new decree on credit information was enacted in February 2010, creating the legal framework for th

establishment and operation of private credit bureaus (PCBs). Potential PCBs may become operation

in 2011. A public registry exists, but is not available to MFIs.


30/74






30

AzerbaijanKey characteristics of the microfi nance business environment:

l The microfi nance sector in Azerbaijan has grown rapidly in recent years, but has been hampered unti

recently by a lack of legislation.

l Foreign non-governmental organisations (NGOs), some of which offer microfi nance services, have

been subject to increased regulatory harassment in recent years.

l Banks dominate the microfi nance sector. The largest, Access Bank, held almost 40% of the total

microcredit loan stock in early 2010.


l

The passage of a new law on non-bank credit institutions (NBCIs) in late 2009 will go a long waytoward clarifying the legal and regulatory regime for microfi nance.

l Expansion in the microfi nance sector slowed in 2009 as the market became saturated and microfi nan

institutions (MFIs) concentrated on portfolio quality and risk management, in light of the global

fi nancial crisis.

l In early 2010 the public credit registry began collecting information from MFIs and providing them

with access to its database. This is likely to increase loan quality over time, although the credit burea

currently covers only 7% of the adult population.

BosniaKey characteristics of the microfi nance business environment:

l The country has a mature microfi nance sector, with high levels of penetration and many players.

l The regulatory environment is divided as a result of the different microfi nance regulations in the

Republika Srpska and Bosnia. Bosnian microfi nance institutions (MFIs) are generally classifi ed as no

governmental organisations (NGOs). At the same time banks such as ProCredit Bank are very active in

microfi nance.

l Supervision is quite strong on paper, but capacity and enforcement do not yet match regulatory

intent.

l Some commentators say a substantial share of microfi nance loans in the past were used to fi nance

consumption, rather than business development, and over-indebtedness has become a key issue thamicrofi nance institutions must address.

l Remittances play an important role in servicing existing debts.


l An increase in portfolio at risk (PAR) is the main issue facing the sector.

l Obtaining funds is becoming more diffi cult, although liquidity remains at reasonable levels.

l Growth in new loans has been slowed by the credit crisis, and regulatory oversight has intensifi ed.

l MFIs are experiencing a negative return on assets, having previously been among the most profi table


32/74





in the region

l A pilot project is underway in Tuzla, fi nanced by the British Department for International Developme(DFID), that seeks to educate people about fi nancial management and the risks of indebtedness.

Known as the Client Debt Advice Centre, this new institution could help to mediate between creditors

and debtors.

GeorgiaKey characteristics of the microfi nance business environment:

l Georgias commercial banking law does not specifi cally limit microcredit, but provisions on

uncollateralised lending are generally very stringent. Microfi nance organisations (MFOs) are

prohibited from accepting deposits.l A law specifi c to microfi nance was passed in 2006, although it makes no provision for deposit-taking

In accordance with the law, organisations can register with the National Bank of Georgia (the central

bank) to become MFOs. There is no interest rate ceiling, and the maximum amount extended by an

MFO to one borrower as a microloan cannot exceed Lari50,000 (US$27,000), which is well above the

average loan size.

l According to a joint MIX Market-CGAP study, MFOs lend to around half of the total borrowers in the

Georgian microfi nance market. Specialised microfi nance banks follow MFOs in terms of number of

borrowers, but have almost triple the loan portfolio.

l Supervision by the central bank is adequate and regulators understand the sector well. The central

bank requires reporting through monthly fi nancial statements.


l Growth in microcredit loans expanded at a double-digit pace in 2009. Microfi nance institutions (MFI

increased their regional reach and began to move into remote areas.

l Georgian regulators continued to mitigate fi nancial risks in the economy, and MFIs have been

pressured to increase their loan-loss provisions.

l Nonetheless, MFIs accounted for less than 5% of total banking assets in 2009 and are not considered

a systemic risk. Traditional banks continue to dominate the fi nancial sector and are the main focus of

fi nancial regulation.

l MFIs are gradually adding new services. Credo, a leading MFO, launched a pilot life insurance product

and a range of money payment systems throughout 2009. In February 2010 Bank Constanta added a

fund remittance system to its roster of services.






32

Kyrgyz RepublicKey characteristics of the microfi nance business environment:

l The country is home to a large number of microfi nance institutions (MFIs)more than 350 in 2009

which suggests a highly competitive environment. However, many of these are small and localised in

their operations.

l The Kyrgyz Republic is considered to be a regional leader in microfi nance regulation. It passed a law on

MFIs in 2002 that permitted a tiered range of MFIs with varying regulatory and supervisory requirements

l In view of the low entry barriers, many small MFIs are poorly managed.

l The limited number of MFIs that can take deposits restricts their ability to upgrade.

Key changes and impacts since last year:l As in all countries in the region, credit growth slowed sharply in 2009 in response to the global

fi nancial crisis and funding constraints.

l The total loan portfolio has continued to grow, but there are reports of a reduction in the customer

base as MFIs concentrate on credit quality to reduce loan losses.

l Increasing political authoritarianism led to concerns about the independence of the National Bank

of the Kyrgyz Republic (the central bank), which regulates MFIs. However, after the recent ouster of

the previous president, the trend towards political authoritarianism may change. Amendments to the

countrys microfi nance law that had not been signed by the previous president are currently being

discussed with the new interim government.

l

The entry into the market of a new state-funded MFIthe AUB-AGRO Microcredit Company, whichplans to lend US$22.5m to the agricultural sector in 2010may undermine some existing MFIs.

TajikistanKey characteristics of the microfi nance business environment:

l There are around 120 microfi nance institutions (MFIs) in Tajikistan, about one-quarter of which can

take deposits. However, most of them are small and lack the capacity to expand their credit portfolio

signifi cantly, which means that demand for microcredit still outweighs supply.

l Despite the high number of MFIs, the microfi nance market is dominated by banks, with the four large

banks holding around 90% of the loan portfolio market share.l MFIs have found it diffi cult to secure licences to accept deposits. However, the National Bank of

Tajikistan (the central bank) is apparently becoming more willing to issue these licences.


l The total loan portfolio has continued to grow, but there has been a drop in loan quality as remittanc

infl ows from relatives working in Russia fell during the global recession in 2009. Commentators repo

a drop in the number of customers served, suggesting that MFIs are concentrating on improving cred

quality.


34/74





l A functioning private sector credit bureau is expected to be in place by the end of 2010, following

passage of legislation a year earlier.l Legislative amendments in 2009 increased disclosure requirements in cases of confl icts of interest,

and increased director liability and shareholders rights, which will improve standards of transparency

within the sector.

TurkeyKey characteristics of the microfi nance business environment:

l Microfi nance remains under-represented within the fi nancial sector, with a large number of unserved

clients, especially in rural areas of Eastern Anatolia.

l As a middle-income country, Turkey has an advanced banking sector, which reduces the need formicrofi nance.

l The percentage of loan recovery is very high. The Turkish Grameen Microcredit Programme (TGMP), o

of the two largest microfi nance players (the other being Maya Bank), claims loan recovery levels of

100%. Portfolio-at-risk (PAR) levels are very low.

l Basic loans are the most common form of microfi nance; these usually start at US$75.

l Lending to individual clients dominates; lending to groups is much less common.


l Authorities are now looking at the microfi nance sector more seriously.

l Several large private banks are launching or are about to launch microcredit products (including HSB

and Sekerbank).

l TGMP has expanded its geographic reach, covering most of Eastern and Central Turkey, including

cities in the West, such as Bursa. TGMP has 32 branches around the country, with more than 10,000

customers.

l Awareness of microfi nance is improving, but remains at a low level.






34

ArgentinaKey characteristics of the microfi nance business environment:l The microfi nance sector in Argentina is small. It is composed mainly of second-tier public institution

non-prudentially regulated entities (such as Sociedades Annimas (SAs) that are associated with

banks) and non-governmental organisations (NGOs).

l Interest rates are not regulated directly, but microfi nance institutions (MFIs) must apply

administratively determined rates when lending government funds. They also face competition from

subsidised, fi rst-tier public lending.

l Sector supervision is weak and the legal and regulatory environment is underdeveloped. As a result,

standards of accountancy and governance remain poor.


l The December 2008 Central Bank circular on microfi nance, which allows banks to grant microfi nance

directly (rather than through SAs), is beginning to have a positive impact on the sector, and banks ar

steadily increasing their presence.

l Two co-operatives were created in 2009, the fi rst to open under a 2007 law pertaining to such fi nanci

organisations. Their full market presence and role is still being established.

l Modest efforts by the Superintendency to begin regulating microfi nance have been impeded by

continued fragmentation of policy across several government institutions, as well as by the growing

politicisation of the Banco Central de la Repblica Argentina (the central bank, under which the

Superintendency lies).

Latin America and the Caribbean


36/74





BoliviaKey characteristics of the microfi nance business environment:

l Bolivia maintains a strong and favourable microfi nance regulatory environment, notwithstanding

the loss of important personnel following the creation of the Autoridad de Supervisin del Sistema

Financiero (ASFI, Financial System Supervisory Authority), some loss in its autonomy vis--vis its

predecessor agency, and uncertainty about the effects of bringing non-governmental organisations

(NGOs) and closed co-operatives under regulation.

l The depth and range of microfi nance services continues to grow impressively, as market competition

remains strong.

l NGOs offer a wide variety of services and practice good governance and transparency, but their

accounting standards remain below international norms.


l The availability of cheap commercial bank on-lending and relative insulation from the international

fi nancial crisis have meant improved profi tability, falling interest rates, and continuing low rates of

arrears and defaults.

l The process of upgrading into formal, regulated institutional status for NGOs and closed co-operatives,

which are now regulated by the ASFI, is underway, with still-uncertain outcomes, timelines, and impacts.

l Consumer-protection regulation of fees and commissions continues to be strict, but no formal intere

rate caps have materialised. Moreover, concessional on-lending has not led to concessional fi rst-tier

competition from public entities as had been feared.

BrazilKey characteristics of the microfi nance business environment:

l Although Brazil is making moves in the right direction, it still lacks a specifi c defi nition of microcredi

that would distinguish it from other lending portfolios, and does not have clear upgrading pathways

for non-regulated institutions.

l Most regulated institutions engaged in microfi nance are banks and co-operatives, however few of

these actually offer microcredit for productive use as this market segment is generally served by non-

regulated institutions.l Co-operatives are growing faster than the fi nancial system as a whole, but a lack of distinction in the

portfolios between microfi nance, consumer fi nance, small business lending, and other forms of credi

makes it diffi cult to know if microcredit is growing.

l Competition from the state and interest-rate caps for loans that use public funding continue to be

obstacles.

l The regulatory capacity of the Banco Central do Brasil (BCB, the central bank) continues to expand

modestly in terms of staff training and co-ordination, but the required level of microfi nance

specialisation is still limited.






36


l The BCBs supervision of, and the transparency of, co-operative governance were strengthened by anApril 2009 law that expanded the terms of banks fi scal commissions and gave a fi scal oversight role t

co-operative federations for the fi rst time, including calling member assemblies when problems arise

l The federal government has adopted fi nancial inclusion as a strategic priority for the BCB and

government as a whole, and the level of training in microfi nance and the degree of interdepartmenta

co-ordination among Central Bank offi cials with such expertise has grown. These efforts come at a tim

when the current government is emphasising microfi nance in its re-election campaign.

l Second-tier funding from various offi cial sources that passes through the Banco Nacional de

Desenvolvimiento Econmico e Social (BNDES, the national development bank) and the Labour

Ministry continues to grow. The Servio Brasileiro de Apoio s Micro e Pequenas Empresas (SEBRAE,

the agency that promotes small business), has recently opened a microfi nance department to providsecond-tier lending.

ChileKey characteristics of the microfi nance business environment:

l The banking Superintendency does not treat microfi nance as a separate activity with different rules,

and does not have signifi cant specialised knowledge of the sector.

l While non-governmental organisations enjoy certain fi scal advantages compared with regulated

microfi nance institutions and do not face interest rate restrictions, they lack the capital and expertis

to upgrade to regulated status, and do not have strong incentives to do so. As a result, they mostly

remain small in size.

l Governance and accounting standards are above average; transparency has room for improvement.


l Commercial and state-owned banks are steadily increasing their presence in the microfi nance sector

through the opening of microfi nance units.

l A legislative proposal is pending that would allow for publication of disaggregated credit history, by

both the public and private bureaus.

l It is not clear that the change of governments and parties will make any signifi cant difference in

microfi nance regulation.


38/74





ColombiaKey characteristics of the microfi nance business environment:

l The mi

EIU Global Microscope on the Microfinance Business Environment 2010

Documents

Transcript of EIU Global Microscope on the Microfinance Business Environment 2010